A Tax Deal Fit For The Gilded Age

December 8, 2010

Zach Carter

President Barack Obama and Congressional Republicans are ready to mortgage the American economy to billionaires in exchange for a few months of unemployment benefits. This deal is easily the gravest economic outrage of the Obama presidency to date, and signals that other political assaults on the economy are ahead.

The basic deal: One year of unemployment benefits, a $40 billion extension of an anti-poverty tax credit, a $120 billion tax cut for workers and some additional tax cuts for American businesses that are already sitting on $1 trillion in cash and refusing to hire new people. In exchange, we get the Bush tax cuts for billionaires, plus an estate tax even more regressive than the worst estate tax implemented by George W. Bush. A few billion for the poor, hundreds of billions for the rich, and nothing—nothing – that will alleviate epic unemployment. It may even fail to prevent the economy from deteriorating further. The best I can say for it is that it will prevent things from getting too much worse.

David Dayen at Firedoglake does some number-crunching and finds $116 billion of actual new stimulus in this deal. He acknowledges that this is a charitable figure, because $56 billion of that total comes from extending unemployment benefits—meaning “not cutting them off”– not exactly a “new” program. Under either calculation, the result is pathetic. The George W. Bush stimulus from 2008 was $160 billion, and featured a roughly similar approach to the stimulative measures in this one: putting money in workers’ pockets. It’s better than not putting money in workers’ pockets, but it’s simply not enough.

This is it, folks—the only economic aid package we are going to see until 2012. If it passes, both parties will praise it as a great bipartisan victory, and critics demanding further economic relief will be told to give it time to “work,” as the worst recession since the Great Depression grinds on and on and on. It will be the stimulus package disaster all over again. And remember, Americans actually liked the stimulus plan when it was enacted. Today, most Americans already want to see the Bush tax cuts for billionaires expire.

The actual consequences of this deal, of course, will be more severe than the political fallout in 2012. We’ll soon hear about “tough choices” facing the country as a result of our allegedly out-of-control budget deficit (bond interest rates, shmond interest rates!). Now that raising taxes on the rich has been taken off the table, those “choices” will translate to devastating cuts in Social Security. After agreeing to useless tax cuts for the rich in the name of economic “stimulus,” Wall Street executives and Congressional Republicans will demand Social Security be slashed, further sabotaging our demand-starved economy, and actually starving our senior citizens.

The United States does not have a deficit problem, with or without the Bush tax cuts for billionaires. Interest rates on U.S. Treasury bonds are at record lows, and aren’t going anywhere with Europe, the U.K. and Japan in serious fiscal distress, and with China buying up as much U.S. debt as it can in order to support its own economy.

But that doesn’t mean the Bush tax cuts for billionaires will be without consequences. Asset bubbles don’t just materialize out of thin air. They occur when a few people have loads of money to invest, while most people don’t have the money to buy things. When most people can’t buy things, the rich can’t invest their money in productive enterprises—however good somebody’s new product may be, it can’t be sold to people who are broke. So investments flow to things that aren’t actually very useful, inflating their value—things like the stock market in the 1990s and the housing market in the Bush years. There are other factors, of course, but severe inequality is a key component.

Right now demand in the economy is much, much weaker than it was in the ’90s or the naughties, and we have a too-big-to-fail banking industry that not only receives generous bailouts, but cannot even be bothered to follow the law in carrying out foreclosures. Extending the Bush tax cuts without seriously addressing unemployment, big finance and foreclosures is asking for another asset bubble. And that’s how we get to a real fiscal problem: another bubble, another round of epic bailouts for banks that are bigger than those we bailed out in 2008 and 2009.

Today, banks are facing huge losses from foreclosure fraud, and asset valuations based on outrageously optimistic home prices that have not come to fruition (translation: banks are pretending big losses are big profits). This is a problem that can be solved, and one that will not wreak economic havoc if investors are forced to help bear the costs of solving it. But so far policymakers have only attempted to address the issue by papering over the problem for banks, with many actively encouraging more and faster foreclosures (read: deflation).

More Bush tax cuts, more unemployment and more bad banking. So we beat on, boats against the current, borne back ceaselessly into the past.

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